May 28, 2022

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What are collateral loans and where can you get one?

Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders who compensate us for our services, all opinions are our own.

Unlike unsecured loans, collateral loans are backed by collateral, or a valuable asset you own. (Shutterstock)

If you don’t have the best credit and want to lock in a low interest rate or borrow a large amount of money, a collateral loan might be on your radar. Unlike unsecured personal loans, collateral loans require you to pledge an asset like a savings account or car, which the lender can take if you don’t repay the loan. 

Let’s take a closer look at what collateral loans are, where you can get them, and some pros and cons to consider.

If you’re considering an unsecured personal loan, you can visit Credible to learn more and to see your prequalified rates.

What are collateral loans and how do they work?

Also known as a secured personal loan, a collateral loan is guaranteed by collateral, or something valuable you own. This might be a house, car, savings account, investment portfolio, or even a piece of jewelry or musical instrument. If you default on your loan, the lender will be able to seize your collateral. You can use a collateral loan for nearly any purpose, whether you need to cover an unexpected expense, pay a medical bill, or make an expensive car repair.

You’ll come across several different types of collateral loans, including mortgages and auto loans. If you take out a mortgage, for example, you’ll use your home as collateral. For an auto loan, you’d use your vehicle as collateral. Other examples of collateral loans include home equity loans or home equity lines of credit (HELOCs), which also use your home as collateral.

Collateral loans are less risky for lenders because they have the right to sell your asset if you default on your loan. This can make collateral loans easier to qualify for than unsecured loans, which pose a greater risk to lenders. 

Where can you get a collateral loan?

You can get collateral loans from a number of financial institutions, such as:

  • Banks — If you already have a checking or savings account with a bank, you may want to start there for a collateral loan.
  • Credit unions — In most cases, you’ll need to be a member to qualify for a collateral loan at a credit union.
  • Online lenders — While most online lenders only offer unsecured loans, some also provide secured loans.
  • Car dealerships — If you’re in the market for a new or used vehicle, you may be able to get an auto loan through a car dealership.
  • Pawn shops — Pawn shop loans are secured by a personal item of value, but they typically come with very high costs.

What credit score do you need for a collateral loan?

Each lender has its own unique requirements for collateral loans. While some require good or excellent credit scores, others are more lenient and work with borrowers who have poor or fair credit scores. If you don’t see credit score requirements listed on a lender’s site, you can contact the lender to find out.

Comparing rates from multiple lenders can help ensure you find the loan that’s best for you. Credible makes it easy to compare your prequalified personal loan rates from multiple lenders.

Lenders that offer collateral loans

While some personal loan lenders only offer unsecured loans, others offer loans that you can secure with collateral. These four Credible partner lenders offer collateral loans:

Avant

  • Loan amounts: $2,000 to $35,000
  • Minimum credit score: 550
  • Acceptable collateral: Car

LightStream

OneMain Financial

  • Loan amounts: $1,500 to $25,000
  • Minimum credit score: Check with lender
  • Acceptable collateral: Car, truck, motorcycle, boat, camper, RV

Upgrade

  • Loan amounts: $1,000 to $50,000 ($3,005 minimum in GA; $6,005 minimum in MA)
  • Minimum credit score: 560
  • Acceptable collateral: Car

The following three lenders aren’t Credible partners, so you won’t be able to easily compare your rates with them on the Credible platform. But they’re also worth considering if you’re looking for a collateral loan:

First Tech Federal Credit Union

  • Loan amounts: $25,000 to $1,000,000, depending on collateral
  • Minimum credit score: Varies depending on amount and security of the loan
  • Acceptable collateral: Stock, First Tech Share Certificate, First Tech savings account

Navy Federal Credit Union

  • Loan amounts: Equal to the amount of your savings or certificate of deposit
  • Minimum credit score: Check with lender
  • Acceptable collateral: Navy Federal savings account, Navy Federal certificate of deposit

Wells Fargo

  • Loan amounts: $3,000 to $250,000, depending on collateral
  • Minimum credit score: Check with lender
  • Acceptable collateral: Savings account, certificate of deposit, home

How to apply for a collateral loan

If you decide to move forward, you’ll generally follow these steps to apply for a collateral loan:

  1. Check your credit score. Since borrowers with the best credit scores are typically eligible for the lowest rates, it’s a good idea to review your credit score before you apply for a collateral loan. This way you’ll know where you stand and won’t be surprised.
  2. Prequalify. Find a few lenders that allow you to prequalify for a collateral loan. Prequalifying usually won’t affect your credit score, so you’ll be able to explore potential offers without affecting your credit.
  3. Compare offers. Compare prequalification offers and look at the collateral accepted, interest rates, terms, and fees for each option.
  4. Make a decision. Figure out which offer makes the most sense for your budget, needs, and preferences. Be sure to choose a lender with collateral requirements you can meet.
  5. Gather your documents. When you apply for the collateral loan, the lender will ask for supporting documents to confirm your financial situation. Be prepared to submit pay stubs, tax forms, bank statements, and proof that you own the collateral you’re offering.
  6. Complete a formal application. Depending on the lender, you may be able to apply for the loan online. Double-check your work before you submit your application to avoid delays. Once you formally apply, the lender will typically run a hard credit inquiry, which can temporarily lower your credit score by a few points.
  7. Wait for the funds. The type of secured loan and lender you choose will determine how long it takes to receive the money. Funding time may be as soon as one business day, or it could take seven or more business days.

Credible lets you easily compare personal loan rates from various lenders in minutes, without affecting your credit score.

Pros and cons of collateral loans

Just like any other financial product, collateral loans come with benefits and drawbacks to keep in mind. 

Pros 

  • They can be easier to get if you don’t have the best credit. Since you’re securing your loan with an asset, collateral loans are less risky for lenders. This means you may qualify for one with no credit or bad credit.
  • They usually offer lower interest rates. Compared to unsecured loans, secured loans often have lower annual percentage rates, or APRs. A lower rate can save you hundreds or even thousands of dollars over the life of your loan.
  • They come with higher loan amounts. Lenders have the legal right to take your asset if you don’t pay back a collateral loan. This can make them more willing to extend higher loan amounts, which will depend on the value of your collateral.
  • They may have better terms. If you’d like more time to repay your loan, some types of collateral loans come with longer repayment terms than secured loans. For example, a mortgage, which is secured by your house, may have a repayment term of 10, 15, 20, or 30 years.
  • They could help you build or improve your credit. As long as you make your monthly payments on time and in full, a collateral loan can help you build a positive credit history. Just make sure the lender you choose will report your payments to the three main credit bureaus — Equifax, Experian, and TransUnion.

Cons 

  • The application process may be more complex. There’s a good chance you’ll need to provide more documents and share more information when you apply for a collateral loan than you would with an unsecured loan.
  • You put your asset as risk. If you default on your loan, the lender may seize your asset. This can be risky, especially if you pledge your car or house.
  • You need collateral. To take out a collateral loan, you must have something of value. If you don’t have the type of collateral a lender is looking for, the loan won’t be an option for you.
  • Not all lenders offer collateral loans. Almost every lender offers unsecured loans. But not all of them extend collateral loans, so you might have to do some more research to find the right collateral loan for your situation.
  • You could hurt your credit. While a collateral loan may help your credit, it can also hurt it if you fail to make your payments on time or, even worse, let it go into default. Lenders will report any late or missed payments to the main credit bureaus, which can stay on your credit report for up to seven years.

Is a collateral loan right for you?

While a collateral loan might be a good option in some situations, it may not make sense in others. If you’re having trouble qualifying for an unsecured personal loan or need to borrow a large sum of money and have something of value you can afford to risk, a collateral loan may be a good fit. Also, if you have poor credit or no credit, a collateral loan can help you build or improve your credit history. 

On the flip side, if you don’t feel confident that you’ll be able to repay your loan, a collateral loan is risky because you could lose a valuable asset. If you have good credit and don’t want to put a valuable asset on the line, an unsecured loan is likely a better option.